Microeconomics-Ch. 14: Firms in Competitive Markets

STUDY

PLAY

market power

the ability of a firm to influence the market price of the good it sells.

Perfectly competitive market

-Many buyers and sellers (no one person or firm can effect price)-Goods are similar to identical (seen as perfect substitutes; perfectly elastic)-Firms can freely enter and exit the market-Firms are "price takers" (market determines the price)

average revenue

Total revenue divided by the quantity sold. (for firms in a PC market, AR=price of the good)

marginal revenue

change in total revenue from an additional unit sold. (for firms in a PC market, MR=AR=P)

maximum profit

a firm will maximize profit by producing the quantity at which marginal cost is equal to marginal revenue.

rules for profit maximization

-if MR>MC, firm should increase its output-if MC>MR, firm should decrease its output-At the profit-maximizing level of output, MR and MC are exactly equal.

PC firm's supply curve

in a PC firm, the supply curve is the same as the MC curve because the MC curve determines how much a firm is willing to supply at a given cost.